Number of the Week: Companies’ Cash Hoard Grows

U.S. companies’ cash hoard keeps getting bigger, a trend both good and troubling.

After hitting new highs in five of the last six quarters, nonfinancial corporations’ cash and other liquid assets reached $1.9 trillion at the end of 2010, according to the Federal Reserve. That’s 7% of all their assets, the highest level since 1963.

On the bright side, the cash pile reflects the resilience of America’s companies and capital markets. Thanks in part to improved resource-management systems, executives have been able to act with lightning speed, slashing costs during the recession and hiring only as much as they need during the recovery — tactics that have generated record profits, if not jobs. Dynamic bond markets have allowed big companies to raise vast amounts of money even as banks have pulled back on lending. That has helped the U.S. avoid the kind of bankruptcy epidemic many had expected.

At the same time, though, the persistent growth of companies’ cash hoard suggests a problem: Businesses appear to lack the confidence in the recovery needed to plow the money back into new projects and hiring. In the final quarter of 2010, capital expenditures amounted to $975 billion, or 6.6% of gross domestic product — up from a low of 5.4% in 2009 but still well below the 10-year average of about 8%. Nonfarm employers added a monthly average of 136,000 jobs in the past three months, just a bit more than required to keep the unemployment rate from growing.

Meanwhile, companies are giving some cash back to their shareholders through stock buybacks, which reached $86 billion in the final quarter of 2010, the highest level since early 2008. That’s an easy way to boost earnings per share, but hardly a sign of optimism. Perhaps investors will find a better use for the money, such as financing the startups that create an outsized share of new jobs.

About Real Time Economics

Real Time Economics offers exclusive news, analysis and commentary on the U.S. and global economy, central bank policy and economics. Send news items, comments and questions to the editors and reporters below or email realtimeeconomics@wsj.com.